Yesterday the Washington
Post’s WonkBlog engaged in some undeserved albeit tepid NAFTA cheerleading
by profiling a new NBER study estimating that the deal has brought a tiny increase
in real wages. And I mean tiny—the authors use a mathematical model
to project that the deal led to a 0.17% increase in real U.S. wages over a
twelve-year period (1993 to 2005). That
means that the average U.S. worker, who was earning $22,000 in 1993, can thank
NAFTA’s first twelve years for a real wage increase amounting to a whopping $37. That’s right—according to the NAFTA-friendly study’s
own theorized calculations, each worker should consider the annual worth of NAFTA to be close to that of a box of Twinkies: about three dollars.

Does such a conclusion merit a blog post entitled “Study:
NAFTA Raised Pay Here and Abroad?”
Probably not. But that’s not the
most concerning element of the WonkBlog piece. The
bigger elephant in the post is that “raised pay” from NAFTA is simply not the
reality for the majority. Neither the
study nor the blog post address the real story of NAFTA and wages: that the deal has fueled a regressive redistribution of income from average workers to the wealthy.

Trade economists widely acknowledge that any U.S. income
increases resulting from NAFTA-style trade deals will tend to disproportionately
favor the wealthy while real wage reductions are likely to be the result for the rest of
us. In standard trade theory, the
Stolper-Samuelson effect predicts that open trade will create increased demand
for U.S. capital-intensive goods and reduced demand for U.S. labor-intensive goods, thereby increasing income
for capital owners (i.e. the wealthy) while reducing wages for workers. Under NAFTA, this regressive impact has moved
from theory to reality. One study by the
Economic Policy Institute estimated that even after taking into account
consumer savings from cheaper imports, a U.S. household with two median wage
earners was losing $1,000 of earnings each year to NAFTA-style trade by 1995,
increasing to a $2,000 annual loss by 2006.
The median U.S. worker probably finds little comfort in a new study that averages
out gains at the top to transform her real $1,000 trade-related loss into a
hypothetical $3 gain.

The regressive influence of NAFTA-style trade on income
distribution may help explain why income inequality in the NAFTA era has
reached historical heights, now apparently surpassing even the inequality
levels of 1774. Median real incomes in the
U.S. have been falling for the last decade, while the income of the richest 1%
has been continually climbing. Workers’ productivity
has been steadily rising while labor’s share of income has been steadily
falling. Why are workers getting paid
less while doing more? Economists from
institutions ranging from the Economic Policy Institute to the Federal Reserve have
named NAFTA-style trade as a key answer (“increased globalization and trade
openness,” in the words of Federal Reserve economists). So the income-related takeaway from NAFTA is
not the deal’s miniscule impact on aggregate wages (whether negative or
positive), but its large impact on income inequality.

But even if we were principally concerned with the miniscule
aggregate impact, the study featured in the WonkBlog omits several key factors, calling into question the small positive impact it cites. First, the study only aims to estimate the
impacts of NAFTA’s tariff reductions, which were a focus of only 6 of the
deal’s 22 chapters. The authors make
explicit the limitations of disregarding the brunt of the agreement’s content,
stating, “Unquestionably, NAFTA had more provisions than only reducing tariff
between members and by no means our results should be interpreted as the trade
and welfare effects of the entire agreement” (pg. 27). Non-tariff NAFTA provisions that could impact real
wages include those found in the deal’s intellectual property chapter, as Dean Baker notes over at the Center for Economic and Policy Research. The chapter grants pharmaceutical firms and other
corporations anti-competitive patent extensions, which tend to inflate the cost
of medicines and other patented products, thereby eroding consumers’ real
wages.

In addition, the wage increase cited by the WonkBlog ignores
another side of the tariff reduction coin: loss of tariff revenue for all three
NAFTA governments. The study itself
notes that this loss in fiscal revenue actually outweighed the purported real
wage gains for Mexico and Canada. Taking
into account reduced tariff income, the authors conclude that the net income
effect of NAFTA’s first twelve years is a 0.1% loss for both Canada and Mexico (pg. 25).
In the United States, the lost tariff revenue reduces the Lilliputian wage impact
even further, yielding a purported 0.1% net increase to aggregate income. At that rate, the hypothetical average U.S. worker
did not see a gain of $37 under a dozen years of NAFTA, but just $22—less than an average tank of gas. Meanwhile the actual
median worker continues to lose at least $1,000 each year under NAFTA-style
trade. One of these facts seems worthy
of a blog post. One does not.

In 2003, Warren Buffett recommended that we impose "balanced trade" on companies that import from China. In other words, we would import no more from China than they import from us. That would reduce the trade deficit to near zero and would bring back millions of jobs.

My new e-book, "Don't Blame Wal*Mart If Your Job Went To China" is available on Amazon/Kindle. If you don't have a Kindle reader, you can download the Kindle software for free to your PC, laptop, tablet or smartphone.

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Eyes on Trade is a blog by the staff of Public Citizen's Global Trade Watch (GTW) division. GTW aims to promote democracy by challenging corporate globalization, arguing that the current globalization model is neither a random inevitability nor "free trade." Eyes on Trade is a space for interested parties to share information about globalization and trade issues, and in particular for us to share our watchdogging insights with you! GTW director Lori Wallach's initial post explains it all.

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